Americans lack financial intelligence as evidenced by high foreclosure rates and low savings rates. Be part of the solution by educating tomorrow's consumers on smart spending practices. Teaching "The Devil and Tom Walker" in can help improve your student's basic financial knowledge.
These notes on "The Devil and Tom Walker" can be given as one big note-taking bonanza or dispersed intermittently as you read the story. No matter how you use them, be confident that you are teaching tomorrow's consumers how to be responsible.
Financial Principle #1: There Are No Shortcuts to Wealth
Tom Walker’s shortcut through the swamp ultimately leads to his meeting with the devil, which in turn leads to his ill-gotten riches. Shortcuts to wealth include lying, cheating, stealing, borrowing too much money, and illegal and unethical practices. Those who engage in such practices enjoy their money for a season without ever enjoying the true prosperity which comes from implementing sound financial practices: paying yourself first 10% of your income--a practice which would entirely eliminate the need for the modern day Tom Walkers we discuss—building a reserve fund covering 3-6 months of living expenses, educating yourself on money and investments, and getting post secondary training or a college education.
Financial Principle #2: Understanding Interest Rates
Compare Tom’s interest rate, 4% monthly, to the interest rate on an average mortgage, 6.5% yearly. Many see the 4 and assume Tom’s is better. Point out the difference: monthly v. yearly. Tom’s monthly rate compounded over a year is actually over 60%, nearly 10 times what many pay on their house today. Talk about how wonderful it is that charging such exorbitant rates is illegal and unheard of in our advanced society (this is a trick). Then discuss Modern Day Tom Walker #1, payday loans, whose AYP are over 100%.
Financial Principle #3: PayDay Loans Are Bad
Drive on any street in any town in the United States and you’ll find as many PayDay loan businesses charging rates far in excess of Tom Walker’s as you’ll find intersections. You’ll also find students in your class whose families have taken out these loans, so tread lightly. These short-term loan centers charge a $15 fee on a two-week loan for each $100 borrowed, a 390% annual interest rate. If you borrowed $1,000 at 390% interest, broke your foot the next day, lost your job, and returned a year later to satisfy your creditors, you would owe more than $32,000. Pawnshops have known this secret for years as have loan sharks. Income tax services have also gotten in on the action, charging consumers $150 to get their $1,000 refund check two weeks sooner. I wish these were the worst offenders, but they’re not. That distinction belongs to Modern Day Tom Walker #2, the predatory mortgage lender.
Financial Principle #4: Just Because the Person Smiles a Lot Doesn’t Mean He’s Doing What’s Best for You
The 4th lesson is on watching out for salespeople.
Tom Walker was “the universal friend of the needy, and he acted like a friend in need; that is to say he always exacted good pay and good security." Many “friends" in the mortgage business, during the recent real estate boom, pushed unscrupulous loans on unsuspecting customers. Some simple financial education can prevent these unscrupulous loans from being pushed on you and your students. Show students how to read a truth-in-lending statement and explain how lenders took advantage of borrowers by recommending option arms, negative amortization, and interest only loans. A brief history of mortgages lesson might prove beneficial. If you are familiar with how expensive and unwise investment products work, such as cash value life insurance, teach that as well.
The author's experience as a teacher and formerly licensed financial planner (that, by the way, didn't work out as well as I would have liked).
All images are in the public domain.